Swiss Bank Recommends Nestlé Covered Calls

Swiss private bank
Bank
Leu
is recommending clients sell covered
calls on shares of Swiss-based food manufacturer Nestlé.
Markus Pfister, head of
trading in Zurich, said the strategy entails a client buying Nestlé
shares and simultaneously selling an over-the-counter call option
struck at CHF3,500 (USD2,137). A 12-month call option with this
strike has an implied volatility of 23% and generates a premium of
10%. Clients can use the premium earned from selling the option to
subsidize the cost of buying the stock. But the downside is that
they limit their profit in the first year--if the share price rises
above the strike level, the option is exercised.

Pfister is recommending the trade now because
Nestlé's share price has fallen from CHF3,800 at the beginning of
January to CHF3,370 on Monday. The fall has pushed implied vol from
20% to 23%. This means clients earn more premium for selling the
option and can buy the stock more cheaply now than they could at
the beginning of the month.

Pfister anticipates Nestlé's share price will be
volatile over the next 12 months but does not think the
European-style options will be in-the-money at maturity. He said
"The market is split between whether the stock will go up or down,
and that usually means it will stay in a range."

Pfister said his clients have pulled the trigger
on about CHF10 million of these deals in the last two weeks. The
trade uses OTC options because they are more flexible than listed
derivatives. For example the strike that Pfister recommends,
CHF3,500, is not available in the listed market.

John Keele, equity
analyst at
BNP Paribas
in London, said Nestlé's share price has fallen
since the start of the year as investors have moved away from food
stocks. Last year, food companies' share prices rose and now some
investors think the sector is overvalued. BNP Paribas still rates
Nestlé a buy because the company has restructured its ice-cream and
European pet food departments and is now better positioned for
growth. The bank has a 12-month price target of CHF3,985 on the
company.